Impact of GST on the insurance industry

By Registrationwala

20th May 2017

Goods and Services Tax (GST) is an important milepost in the indirect tax regime prevalent in India. What it does is subsume all the different taxes into one single tax. It will impact many an industry, with insurance being one of the important ones.

Biotechnology, banking and insurance and three sectors that are pitted to surge ahead in India's bid for all-round development in all spheres, and so it becomes all the more important to probe what impact GST will have on the insurance industry.

Current taxation laws

Tax is imposed on goods and services. On the latter, the service tax is charged at the rate of 15 percent. The breakup of that is as follows: 14 percent is the basic service tax, 0.5 percent is the Swacch Bharat tax and the rest 0.5 percent is Krishi Kalyan tax.

Impact on insurance premiums

Now when the GST finally goes live in some time, all these taxes will be merged into one, as discussed before. How insurance premiums will be affected depends on the final GST taxation value that is decided.

However, if reports are to be believed, the figure is set to be around say 18 percent, which is higher than the sum total of the taxes we pay right now. So, logically, the insurance industry will see an increase in the insurance premiums that you have to pay, albeit the surge may not be as much as some of the other industries might face. It will be around 3 percent or in technical terms, 300 basis points.

In the current regime, there are two taxation slabs for the insurance premiums. The term insurance or the insurances based on pure risk factor are charged a service tax of 15 percent. On the other hand, the endowment and ULIP premiums are charged at somewhat concessional rates, given these insurances have an investment factors associated with them. The concessional tax rate is as low as 3.75 for the first premium while it is a mere 1.875 for the subsequent renewal premiums.

In case the GST service tax is set around 18 percent, the concessional tax rates on these endowment and ULIP policies will stand revised too. So, under this new GST regime, the concessional tax rate on the first premium will be 4.5 percent and the same on the renewal premiums will be lugged up to 2.25 percent. It is evident that in long term, these would not account to small amounts.

To delve further deep, single premium insurance policies attract a service tax of 1.5 percent currently but it will stand increased to 1.8 percent when Goods and Services Taxation takes over India.

The GST bill does not embody any provisions for the concessional GST on the lines of concessional service tax for ULIPs and endowment policies. That could mean paying the peak rates for GST for these products but some development and modification is expected on this front.

Impact of GST on non life insurance premiums

Non life insurance premiums can be health policies, home insurance, motor insurance et al. For these policies, you pay the premium that will be used to compensate the loss as and when you encounter it.

Under the current regime, all non life insurance policies are charged 15 percent of the service tax. So this will also go up by 3 percent, meaning the new rate will be as high as 18 percent.

Here is everything listed nicely in a table for you to refer:

Nature of insurance policy

Rate before GST

Rates after GST

Pure risk insurance/term insurance

15%

18%

ULIPs

15%

18%

Annuity: single premium

1.5%

1.8%

Motor insurance

15%

18%

Endowment policies (1st year)

3.75%

4.5%

Endowment policies (2nd year onwards)

1.88%

2.25%

Health insurance

15%

18%

As you can see, most insurance policies, in fact all, are set to get costlier.

What this means for the insurance industry

The insurance industry works very differently from other industries. For example, term insurances pay you only when something happens to the insured commodity, be it you or your beloved object. The insurer pays you only when the insured person passes away within the time period when the policy will be active. The insurer takes all the money if the person survives for longer than the insurance terms.

On a similar note, health insurances pay you when you fall sick, or worse are hospitalized.

The sensitive nature of these policies, basically the product that the insurance industry offers, means that people are very skeptical investing in it, especially the middle class, which forms the bone of tax paying strata.

So with insurance premiums set to increase, there is set to be a war between different insurance companies in the market, because people will now be more averse to invest. And it does not spell good news because the insurance industry has been gradually slowing down despite all the predictions of boom. The growth rate was 4.6 percent in 2009 and it was recorded as 2.6 percent in 2016 - the figures should suggest that GST might not ring good bells for this industry and that some special measures are the need of the hour.

The Life Insurance Council, the prime body for all insurance companies, is said to have written to India's finance minister. They seek that the GST should only be charged on premium collected by the insurer ad not on the investment portion of the policies, which constitute of the major part and is something that lures public into long term, tax saving or not, investments.

What should you do

You should still go for insurances is what we propose.

15 percent or 18 percent, the tax rates should never be a criteria for selecting an insurance policy or for considering an investment. There are many other factors you should consider, mostly where to invest, and if the insurance company you are investing in has a good track record to settle.

Also, it is a heartfelt advice to always go for health policies. Whatever the final GST rate be, whatever the premium might increase to, what is assured is that the rise will be sane and that the government will find ways to make you invest in it.